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Among recently concluded agreements are Japan-Thailand and U.S.-South Korea FTAs. Japan has shown interest in an FTA with the United States in response to the U.S.-South Korea agreement. There are 220-odd such agreements in existence today, and they are expected to scale up to 400 by the end of this decade.
The agreements have played a key role in fostering freer trade in a globalizing world. With the establishment of the General Agreement on Tariffs and Trade after World War II, the multilateral approach was the preferred method of trade liberalization. The World Trade Organization was brought into existence after GATT to fix the anomaly resulting from special treatment allowed under GATT for its member nations to subsidize production or agriculture and export and limit market access.
This practice ultimately resulted in decreased commodity food prices, distortions in global agriculture trade and frustrations from non-subsidized agriculture exporting nations. One of the noble objectives of the WTO was to eradicate this trade distortion and improve food prices thereby, improving the welfare of farmers.
The Uruguay round of trade talks from 1986-94 touched issues ranging from agriculture, international property rights and technical barriers to trade. Since the Agreement on Agriculture was just an interim agreement while the final goal was full liberalization, it was agreed that the negotiations would resume in 1999.
Enter the Doha development round launched in 2001 and followed by subsequent rounds of negotiation. One of the thorniest issues dividing the developed and the developing world was the issue of agriculture subsidies, even though agriculture makes up less than 8 percent of world trade. Due to a deadlock in negotiations, the discussions were halted in July 2006 until the recent meeting of the United States, the European Union, Brazil and India in Potsdam, Germany in June 2007, after which discussions halted again. They may resume only after the U.S. presidential election next year.
With globalization comes the possibility of buying and selling goods and services anywhere in the world. If this is left to market forces alone, it can create distortions in development patterns and is vulnerable to foul play by the few. To harness the true benefit of globalization there was need for an organization that represents all societies and ensures that both developed and developing countries benefit equally in the era of globalization. Hence the WTO was formed on the basis of the multilateral trading system. While no one denies the benefits fostered by such a multilateral trade agreement, in reality it has been difficult for the developed and developing countries to agree on the end game.
A direct consequence of the slowdown in the Doha round was the resurgence of regional trade agreements in the form of FTAs and bilateral trade agreements. FTAs, many of which are bilateral, are arrangements in which countries give each other preferential treatment in trade by eliminating tariffs and other barriers on goods. Each country continues its normal trade policies with other countries outside the FTA agreement.
One of the advantages of bilateral agreements is that countries can choose when to enter into agreements. The United States and Canada were ready to start the FTA process in the mid-1980s. Mexico followed a few years later and the U.S.-Canada FTA was folded into the North American Free Trade Agreement.
The Central America-Dominican Republic-United States Free Trade Agreement was negotiated in 2004-05 when the United States and the other countries decided there were economic and foreign policy benefits. A U.S.-Korea FTA would not have been doable 10 years ago.
Regional or bilateral trade agreements also have an advantage over the WTO in dealing with intractable trade problems, as the WTO usually must cater to the lowest common policy denominator.
In theory a global trade agreement is an ideal solution in terms of resource allocation, economic welfare and economic prosperity. The next best solution is the regional trade agreement which lowers the trade barrier amongst members without having to lower barriers for non-members. However, resolving systemic issues such as rules of origin, antidumping and subsidies are best left to multilateral trade agreements.
The WTO supports the existence of such regional agreements as long as they are transparent and help deepen trade and economic liberalization without raising trade barriers for non-members or creating trade diversion resulting in imports from an inefficient supply base.
There are many reasons the momentum of regional trade agreements has picked up in the recent past. One reason is that they can be negotiated quickly, since a limited number of parties are involved, and can charter into areas such as investment, competition, IPR, labor standards, environment provisions, etc. -- some of which are only given broad-brush treatment in WTO agreements.
Regional agreements also help developing countries to experiment with domestic reforms and regulatory policies, and provide an opportunity for domestic markets to learn how to cope with limited foreign competition before a full onslaught in a multilateral regime. A developing country negotiating such an agreement with a developed country can also expect non-trade preferential benefits such as development assistance and freer market access, gaining a point over other competing WTO members.
It is well known that Asia has emerged as a key player in the global trade ecosystem. The World Bank expects the global economy to grow at a much faster pace in the next three decades as compared to the previous three, as large developing countries such as India and China witness high growth and integrate with the rest of the world at an unprecedented pace. The share in the global output of developing countries is expected to increase from the present one-fifth to one-third in the next 25 years.
While integrating with the global trade and production system, Asian economies have also deeply integrated regionally. Intra-regional trade in East Asia makes up 55 percent of the region's total trade, which is up from 35 percent in the 1980s. This is a result of the conscious effort by Asian governments to embark on closer monetary and financial cooperation after the Asian financial crisis and initiatives such as the ASEAN Surveillance Process, Chiang Mai Initiative and the Asian Bond Market.
Compared with the United States and Europe, Asia was a latecomer in pursuing regional trade agreements or FTAs as an instrument for trade policy. ASEAN was the only significant regional trade pact in existence before 1998. Since then there has been dramatic proliferation of FTAs; there are more than a dozen in existence in East Asia today and twice that number are under negotiation.
This uptick was also a result of dissatisfaction with the progress in global trade talks and the "left behind" syndrome. Such a complicated mesh of overlapping regional and bilateral agreements has led to the "Asian noodle bowl" effect and the overhead to manage a plethora of complex rules, such as rules of origin, can easily defeat the efficiencies expected from such agreements. Further, if the transaction costs are high, it can eventually result in a decrease of foreign direct investment and trade.
Regional trade agreements and FTAs have kept the torch of trade liberalization burning in spite of the breakdown in discussions on global trade agreements. This is of paramount importance as the world enters a paradigm shift in its trade patterns and protectionist sentiments are expected to strengthen further.
Regional trade agreements are here to stay and were given their due importance by being included in the Doha agenda. However, due to the time and attention diverted to the pursuit of regional trade agreements, the commitment to conclude a successful global trade agreement faces a setback.
Whether regional trade agreements will act as building blocs or, as economist Jagdish Bhagwati puts it, as "stumbling blocs" to a global free trade regime remains to be seen. In the immediate future, for successful co-existence of multilateral and regional trade agreements, it is important that the latter enhance the benefits of the former and compliment them rather than substituting for them.
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(Hiren Doshi heads the Beijing branch of a leading IT services company in China, and is also a fellow of the India China Institute. These are his personal views. He can be contacted at hirend@yahoo.com. ©Copyright Hirin Doshi.)
